If you’re a manufacturer, understanding Supplier Relationship Management (SRM) is crucial. Your business relies on delivering products to your target audience, which is impossible without a consistent supply of raw materials and other essential resources.
Effectively managing your relationships with suppliers and vendors is essential for maintaining the viability of your manufacturing operations.
Supplier Relationship Management (SRM) is vital in many organizations. Strong relationships with vendors can result in better pricing, improved planning, quicker responses to unexpected events, and reduced risks in operations and supply chains.
While some SRM best practices are straightforward to implement, others require more effort and creativity.
In this blog, we will discuss the importance of moving beyond traditional supplier management, and offer high-level guidelines on how and where to begin with SRM. Let’s begin!
What is Supplier Relationship Management?
There isn’t a universal agreement on the exact set of tasks covered by SRM, but broadly speaking, its goal is to add value to your organization by helping you make better decisions about engaging with suppliers and potential suppliers.
Evaluating suppliers’ strengths and weaknesses is a fundamental SRM task. For instance, one supplier might be faster, while another might be more cost-effective. This kind of assessment provides supply chain managers with a clear framework for deciding which types of orders should go to each supplier.
Equally critical is determining which goods to purchase from each supplier and knowing when to add new ones. There are benefits to managing a limited number of suppliers, but if another company offers a superior product or service that none of your current vendors can match, it might be worth the additional effort and coordination.
In SRM, knowing when to negotiate, with whom, and for what purpose can be an art in itself, even before the actual negotiation begins. Supplier relationship management also involves knowing when and how to sever ties with a supplier.
While many of these relationship management tasks can be performed analytically, the human factor is also crucial to consider and manage. Relationships between organizations typically involve relationships with individuals at those companies.
These can be connections between purchasing managers and salespeople, warehouse workers and delivery drivers, attorneys drafting contracts, or even CEOs in small companies or significant relationships.
It’s easy to focus solely on the analytical or the relationship component of SRM, but great relationship managers put effort into both.
What is the Process of Supplier Management?
There are several ways to break down the SRM process. While every company might cite slightly different responsibilities and procedures, the following steps should be part of any effective SRM process.
Segment the Supply Base
Supplier segmentation involves organizing suppliers into useful groups to gain insights that will enhance supplier relationships, including the kind of effort and attention each group requires.
For instance, categorizing suppliers by the items they provide may highlight where the business risks having too few suppliers or where there is confusion—and potential savings left on the table—by having too many.
You can further segment suppliers using a schema like the Kraljic matrix, which classifies supplied items according to their risk and importance to the company’s bottom line. For example, you may be able to negotiate more aggressively on price for an item that is easily available from multiple suppliers, even if it contributes significantly to profit.
Likewise, negotiations with suppliers providing non-critical, widely available items should focus on reducing the administrative and logistical burdens of acquiring these items, allowing you to concentrate on more critical tasks.
Insights from such segmentation prove especially valuable during sudden supply chain disruptions, which have become more common in recent years.
There are many ways to segment suppliers, and effective supplier relationship managers use as many methods as appropriate to provide value to the business. Don’t hesitate to experiment with various methods or even create one of your own.
Create a Supplier Strategy
This step combines two elements:
- Defining your ideal supplier scenarios—what you want your supplier arrangements to look like—and
- Determining the moves and changes needed to achieve that ideal or at least bring your actual arrangements closer to it.
Consider this hypothetical case to illustrate a supplier strategy in action. Suppose Supplier A is great, but the prices are too high; Supplier B is difficult to deal with; and Supplier C isn’t reliable enough to be your sole vendor for a mission-critical component.
Your ideal arrangement would involve obtaining lower prices from A, improving interaction processes establishing clearly defined responsibilities with B, and giving a different supplier some of the business currently given to C to mitigate risk by building a relationship with a redundant provider.
However, this isn’t a realistic strategy until it translates into a plan of action.
For Supplier A, will you get a competing offer to negotiate a better price, or will you offer more business in exchange for a volume discount?
For Supplier B, will you spend more time getting to know their team and processes to reduce friction, or address issues with a more formal approach, incorporating explicit responsibilities into the next contract renegotiation?
Before finding a backup for Supplier C, should you warn them, and should you look among your existing vendors first (minimizing disruption to C’s flow of business), or plan to reallocate 50% of the business to a new supplier?
Collaborate With Suppliers
Recognizing the nuanced role of collaboration in SRM is not always intuitive for supply chain managers. If you’re buying from a company, that’s the relationship, right? Once you’ve coordinated orders, payments, and deliveries, what further collaboration is required?
Much advice on managing suppliers and procurement focuses so much on transactional components that the value of a good collaborative relationship can be overlooked.
Collaboration with suppliers can take two forms: informal human-to-human connections and formal collaborations between the two organizations. Informal collaboration happens organically with good relationship management.
Beyond orders, deliveries, and payments, people get to know each other’s businesses and priorities. Suppliers can provide advance notice of significant changes like price adjustments, deals, shortages, and new product introductions, while customers can similarly inform suppliers about their needs and wish lists.
Sometimes these relationships become deeper and more formalized, with the purchasing business having a direct collaborative role in developing the products it buys.
These collaborations are prevalent across industries. For example, Visa and Citigroup are vendors for Costco, providing payment processing services, and the three companies collaborate to produce the co-branded Costco credit card.
In the transportation sector, collaborations are common, from battery technology companies working with electric vehicle makers to aircraft manufacturers collaborating with airlines on R&D investments.
Such supplier-customer collaborations drive innovation, resulting in increasingly advanced products. Additionally, large companies buying from small startups have long helped these startups grow into ideal future suppliers, attuned to their significant customers’ needs.
Execute the Strategy
For supplier relationship managers who have effectively handled the first three steps, the next step should be straightforward. Excellent and adaptable planning facilitates smooth execution.
When executing the strategy, follow the plan developed during the strategy phase. While things may not always go as planned, good collaborative relationships with suppliers will help you adjust on the fly, and effective supplier segmentation will help you prioritize what’s most important during triage situations.
Improve Supplier Quality
There are two main ways to enhance supplier quality. The first is to change which companies supply which items and when. By segmenting and identifying the strengths and weaknesses of your suppliers, you can adjust the timing of orders to improve the quality of orders and/or the speed and reliability of deliveries.
You can also work directly with a supplier to improve its quality—either in an objective sense or specifically as it pertains to your business. Sometimes this can be achieved simply by asking. What might be a meaningful product improvement for you could be a simple change for a supplier—they just need to know you need it.
For example, if you’re buying safety signage for a factory, and your sign maker doesn’t know that your walls are almost the same color as its default sign color, it won’t know to offer a different color to make the signs stand out. If you don’t ask, you might not realize the sign maker can easily produce signs in another color.
Continually Monitor and Adjust
This step distinguishes between having a supplier relationship and managing a supplier relationship, making SRM a critical business function. It’s not enough to perform these tasks once.
Your business needs will change; your suppliers will change; technology will change; customer expectations will change; and economic conditions will change. Everything needs to be continually monitored, and all related decisions need to be periodically revisited and reevaluated for necessary course corrections.
When setting things up, establish good data collection infrastructure (both technological and human processes) to ensure accurate data collection. Remember that monitoring involves not just your suppliers but also their competitors and the marketplace in general.
The information collected will feed back into segmentation and strategizing, restarting the cycle.
FAQ: What is Supplier Relationship Management?
What are the types of supplier relationships?
Supplier relationships range from transactional (focus on cost and efficiency) to collaborative (strategic partnerships for mutual benefit), including arms-length, preferred, and strategic alliances based on trust and cooperation.
What is the difference between SCM and SRM?
Supply Chain Management (SCM) oversees the entire flow of goods, from raw materials to delivery. Supplier Relationship Management (SRM) specifically focuses on managing and optimizing relationships with suppliers.
What is the supplier relationship cycle?
The supplier relationship cycle includes identifying, evaluating, and selecting suppliers, negotiating contracts, managing performance, fostering collaboration, and periodically reviewing and adjusting the relationship to ensure ongoing value.
Conclusion
Supplier relationship management is crucial for optimizing supplier interactions, reducing risks, and improving overall operational efficiency. By implementing SRM best practices, organizations can achieve better pricing, enhance planning, and respond swiftly to unexpected events. For advanced SRM solutions, consider partnering with Qodenext to elevate your supplier management strategies.
